Possible mega deal: Deutsche Telekom and T-Mobile are considering a merger

This transaction volume would dwarf the takeover of Mannesmann by Vodafone and would be the world’s largest merger of two listed companies. The Bloomberg news agency first reported on the plans. Telekom and the federal government, as its most important shareholder, did not want to comment on this issue. T-Mobile could not immediately be reached for comment.

A holding company will take over both companies

According to the insiders, what is being discussed is the establishment of a holding company that would make a takeover offer for both the shares of the Bonn group and those of the US subsidiary. The combined company is expected to be listed on Wall Street and a European stock exchange. The considerations are at an early stage and details could still change. Telekom is apparently hoping for a share price boost by creating a transatlantic champion. Its improved financial strength could be useful in future takeovers, one of the insiders added.

The experts at the research house New Street explained that Telekom is primarily targeting the US market. In the event of a larger takeover, the Bonn-based company’s share in T-Mobile could slip below the 50 percent mark. In a merged company, however, the group would retain control over the high-growth and profitable US business.

In Europe, however, the chances of takeovers and mergers are lower. Here, telecommunications companies operate in comparatively small, highly competitive and strictly regulated markets. The respective supervisory authorities usually insist on a minimum number of providers.

At the same time, companies have to invest billions in expanding their mobile and fiber optic networks. Telekom is currently sitting on a mountain of debt worth around 200 billion euros. At T-Mobile it is the equivalent of around 100 billion euros.

Little favor from investors

The plans were met with skepticism on the stock market: Telekom stocks fell by around three percent on Wednesday. T-Mobile’s shares closed on Wall Street on Tuesday with a loss of 1.5 percent, below the level before the first media reports about the possible merger were published. “We don’t think investors were waiting for this deal,” commented the experts at investment advisor Kepler Cheuvreux. US investors in particular would hardly want to invest in a European company with weaker growth.

A merger is not a panacea for increasing company value, wrote analyst Robert Grindle from Deutsche Bank. The savings potential for telecom companies is manageable. Similar to other internationally operating competitors such as Vodafone, the combined Telekom/T-Mobile group is expected to be valued lower than the sum of its parts. Telekom’s market capitalization is currently almost 135 billion euros. T-Mobile has the equivalent of 252 billion euros.

A merger between Telekom and T-Mobile would have to overcome a number of hurdles: the federal government is the largest shareholder in the Bonn-based group with a total of around 28 percent. It is still unclear how he would assess a merger. Since Telekom currently holds around 53 percent of T-Mobile, the state share would be diluted in a merger. According to Bloomberg, the plans include locating the planned holding company abroad, which would mean losing national control. In addition, the considerations come at a time of heightened political tensions between the USA and Germany. “These are speculations on which we generally do not comment,” said a spokesman for the Ministry of Finance. He doesn’t know of any federal government plans to sell shares in Deutsche Telekom.

T-Mobile developed from a problem child to a beacon of hope

Telekom entered the US market in 2000 with the takeover of Voicestream. The initial euphoria was followed by disillusionment. T-Mobile became the group’s problem child and was even up for sale at times. In recent years, however, the US subsidiary has become the Bonn-based company’s growth driver. It regularly leaves its US rivals AT&T and Verizon behind in terms of customer growth.

Last year, T-Mobile generated an operating profit of around 29 billion euros. Telekom achieved an operating result of around 44 billion euros.